"In this questionable home-builder equity environment, we do not think investors will be rewarded for any type of incremental risk, regardless of the quality of the equity. Therefore, we believe it behooves investors to cool their collective heels and let this story play out a bit before committing new money."- Pali Research analyst Stephen East, on the homebuilder stocks. (MarketWatch, July 11th)

Real Estate Sales and House Prices

Can’t Sell Your Home? Maybe It’s Priced Too Low (NY Times, July 11th): "The high end of the market is surviving the slump much better than any other segment… The national trend has gone largely unnoticed, though, because neither the federal government nor the National Association of Realtors — the main sources of housing data — report statistics for different price segments… DataQuick Information Systems: In the Boston area, for instance, the number of homes selling for at least $1 million plummeted to 619 in the first five months of 2006, from 773 in the period in 2005. But the number jumped to 711 in the first five months of this year. In the New York region… homes in the most expensive 5% of the market — have also been rising, [with] the middle and bottom of the market falling. The same is true in the San Jose, Calif.; Seattle; Denver; and Houston areas. In San Francisco, Los Angeles, Phoenix and Miami, high-end sales are down but not by nearly as much as sales in other price segments."

Local Home Prices Increasing (KVEW TV, July 10th) Washington: "Windermere Real Estate broker Dave Retter: "Tri-cities is very healthy. We've been on a ten year expansion, where we've seen an average sales price increase of 5%/year for the last ten years." That means steady and consistent growth. No giant bubbles, and no subsequent bursting of that balloon. From 1998 to 2007, the average sales price went from almost $119,000, to a little more than $186,000."July is off to a great start. June was great… Last month, the median price of a home in the Tri-Cities was $174,000 -- the highest ever for a single month."

Tell Us, 'How Long Will It Take To Build 84,000 New Homes?' (OC Register, July 10th): "MarketPointe Realty Advisors recently reported that developers have long-range plans to build just over 84,000 new homes in Orange County.About 5% of those are in the advanced stages of development -- either with approved plans or with homes already under construction, the San Diego real estate consultant said. The rest are in the "early stages…" Building permits were issued for more than 200,000 new homes in Orange County in the past two decades… Developers pulled permits for just over 8,300 units in 2006, and O.C. permits are on pace for just over 8,000 units this year."

Condoldrums: The Sluggish Housing Market Extends To Many Of The Area's Condominium Projects (Wisconsin State Journal, July 9th): "South Central Wisconsin MLS: Like the single-family housing market, the Dane County condominium market suffers from excessive inventory. A total of 2,470 condos were on the market during Q1'07, more than double the number two years earlier, and 252 were sold… City Assessor: The number of Madison condominium parcels in new and converted buildings rose 12% last year to 14,012, representing about 21.4% of all residential and commercial properties… About $194 million worth of condo projects were completed last year in the city, more than six times the $32m in projects completed in 1997."

D.M. Area Weathers Housing's Ebb, Flow (Des Moines Register, July 8th): "Des Moines Area Association of Realtors: The number of homes sold last year fell only 2% from sales in 2005, a record year. So far this year, home sales are 1.5% below 2005, while the average sale price has climbed 2.6% to $164,142, from $160,045 in 2005. Homebuilding… dropped 26% in the D.M. metro area from January-May vs. a year ago, building permits from the U.S. Census show. Construction activity fell 23.5% in the D.M. area from 2005-2006. Home construction also has fallen across the state, with all metro areas showing a decline except for Ames and Iowa City."

Real Estate Investing and Sentiment

U.S. Chinatowns Becoming Prime Real Estate (CBS News, July 10th): "As America's downtowns become hip again, urban real estate is becoming so valuable that ethnic enclaves find it increasingly difficult to survive… Once a fixture in most major US cities, many Chinatowns have ceased to exist as magnets for new arrivals. San Diego's Chinatown is now a historic district. A coalition in Phoenix is trying to save the last remaining Chinatown structure from becoming a luxury apartment building. Four of the enclaves in the 10 largest cities – in Los Angeles, Chicago, Houston, and Philadelphia – are now commercial areas. Dallas, which never had a historic Chinatown, designated a retail center as "Chinatown" in the 1980s. Other Chinatowns in Seattle, Detroit, San Francisco, and Washington, D.C., are today primarily tourist spots."

Mortgates and Real Estate Lending

Study Finds Home Loan Disparities With Blacks, Hispanics (Burlington Free Press, July 11th): "National Community Reinvestment Coalition report: Based on an analysis of the most recent Federal Reserve nationwide mortgage data [and by] analyzing 2.3 million loans in 380 metro areas: Middle-class and upper income blacks in 171 metropolitan areas in 2005 were at least twice as likely as whites with similar incomes to receive loans with high rates. By comparison, there were 70 metropolitan areas where low-income blacks faced a similar likelihood of receiving above-market rates. Low-income blacks in all areas were more likely to have pricey loans than whites with similar incomes."

Subprime Fallout and Foreclosure Impact

Moody's Downgrading Subprime Mortgage-Backed Securities; S&P to Follow (Judith Levy in Seeking Alpha, July 11th): "Ratings agency S&P said it might cut the ratings of up to 612 subprime mortgage-backed securities, worth $12 billion… it will revise its ratings methodology, and review the "global universe'' of subprime CDOs-- threatening CDO investors with a potential loss of up to $250b. Moody's is downgrading 399 mortgage-backed bonds issued in 2006 and reviewing 32 more, amounting to $5.2b. It also slashed the ratings of 52 bonds issued in 2005… The downgrades -- believed by many to be long overdue -- reflect surging mortgage delinquencies, sluggish home prices, and poor underwriting standards for loans… Moody's shares shed 1.8% to close at $60.39 and shares of McGraw-Hill, which owns S&P, were off 4.4% at $64.24."

S&P Weighs Downgrades On $12 Billion In Subprime MBS (Inman News, July 11th): "The news that Standard & Poor had placed 612 classes of [subprime] residential mortgage-backed securities on "CreditWatch negative" Tuesday sent Treasury rates up and the dollar down, and could increase the cost of financing a home for some [credit-risky] borrowers. Many of the securities were backed by loans originated by bankrupt New Century Financial Corp. (PINK:NEWC.PK) and Fremont General Corp., which had a subprime subsidiary that was shut down by federal regulators in March. Between 75%-80% of the loans backing each of the 612 classes placed on CreditWatch negative are subject to "some type of payment adjustment" over the next 18 months."

Del. Sees Record Number Of Foreclosures (Delaware Online, July 11th): "Foreclosure filings in Delaware rocketed to a record high over the past year, up 29.5% from the previous year, court records show. Delaware recorded 2,962 mortgage foreclosure filings in fiscal year 2007, which ended June 30, up 20% from the state's previous record in 2003. Delaware filings for the month of June were higher than any month of the year in all three counties."

Foreclosures Down In June, Second Quarter (South Florida Business Journal, July 10th): "Default Research: The number of foreclosures in South Florida was nearly the same from the first to the second quarter, but declined from May to June, with Miami-Dade County seeing the biggest drop-offs… There were 6,630 foreclosures in South Florida in Q2. That's down slightly from 6,673 foreclosures in Q1. In June, there were 2,175 foreclosures in South Florida, down 8 percent from 2,357 foreclosures in May. However, the June total was up a staggering 167 percent from the 818 foreclosures in the same month last year."

US SWAPS-Subprime Fears Push Spreads To 4-Year Wides (Reuters, July 10th): "Spreads on 10-year U.S. interest rate swaps expanded on Tuesday to their widest levels since the summer of 2003 on fears of a spillover effect from problems in the U.S. subprime mortgage market. The yield premiums on 10-year swaps over comparable Treasuries grew to 66.00 basis points from 64.00 basis points late Monday. The last time 10-year spreads were at this level was nearly four years ago, according to analysts. Swap spreads are considered a gauge of the market's risk appetite."

26 Charged In $200m Subprime Case (Financial Times, July 10th): "US officials charged 26 people with conspiracy and fraud, alleging… they used invented purchasers, stolen identities and inflated appraisals to fraudulently obtain subprime mortgages between [2004-2007] on more than $200m in property in and around NYC… Among those charged are real estate appraisers, a loan settlement agent, mortgage brokers and loan processors in addition to people who purchased the property… The case… helps explain why so many recent mortgages have gone into default so quickly… Prosecutors [claim] three New York brokerage firms, Northside Capital, AGA Capital and its successor Lending Universe, earned more than $4m fees and commissions on allegedly fraudulent loans."

Record Foreclosures in Gibson County (Princeton Daily Clarion, July 10th): "Last week, the Gibson County Sheriff's Dept. advertised its 99th sheriff sale for court-ordered foreclosures, this year, compared to 120 at year's end in 2006, which topped a previous all-time-high 105 sales… The 99th sale notice came Friday, shortly after a report that Indiana bankruptcy filings have spiked nearly 70% in the first six months of the year. Experts said a law change kept 2006 bankruptcy totals artificially low. The U.S. Bankruptcy Court of the Southern District of Indiana… saw a 68% increase in filings, at 7,694 petitions through the end of June, compared to 4,570 filings recorded last year."

Global Impact and Alternatives To The Housing Slump

United Buys US Property Services Firm (Brisbane Times, July 11th) Australia: "United Group Ltd is racing to take part in the consolidation of the global property services industry after buying US-based Unicco Service Company for $477 million and forecasting a rise in full year profit. The buy follows other property service acquisitions in Europe and infrastructure bids in Asia, as part of the Australian infrastructure, engineering and services company's aggressive expansion plan. United, which has been growing revenue at $1 billion a year, said net profits for fiscal 2007 is expected to be more than $90m, about 14% higher than last year's $78m."

The Economist Says There's No Housing Bubble in China (Tim Iacono in Seeking Alpha, July 10th): "Average house prices have risen by 30% in China since 2002, less than the 46% jump in America… At the peak of the boom in 2004, the prices of luxury apartments in Shanghai were rising at an annual rate of 50%, but the government has since successfully cooled the market with a capital-gains tax… In a developed economy, double-digit annual price gains would indeed look bubbly, but not in an economy where nominal GDP is growing at a rate of 14%. Across the globe, studies show that in the long term the main driver of house prices is income. The ratio of average house prices to average incomes… in America, Britain, Spain… has soared to record highs—ie, above levels that preceded previous crashes."

Macro Impact, And Will The Housing Slump Cause A Recession?

Citing Weak Housing Market, Home Depot and Sears Lower Estimates (NY Times, July 11th): "Big-name merchants Home Depot (NYSE:HD) and Sears (NASDAQ:SHLD) announc[ed] yesterday that they were cutting back their forecasts for profit over the next few months as sales of home improvement items fall and consumer confidence weakens… Sears… said it expected net income to be $160m- $200 million. In the corresponding period last year, net income was $294m… UBS economist James O’Sullivan: "Not only are consumers less willing to shop, they are also hesitant to do home repairs and buy appliances… Sears said sales at [its] Kmart stores, a leader in tools, home appliances and lawn and garden equipment, declined across most categories… Home appliance sales fell more sharply than most other categories."

Homebuilders And Housing Stocks

Ebbs and Flows for Housing Market ETFs (Tom Lydon in Seeking Alpha, July 11th): "The SPDR S&P Homebuilders (NYSEARCA:XHB) has lost 21% year-to-date. Holdings include D R Horton (NYSE:DHI), Home Depot (HD), Lennar (NYSE:LEN), Pulte Homes (NYSE:PHM) and Sherwin Williams (NYSE:SHW), ETF Guide reports… Home Depot [cooled] its earning expectations for the year partly because of the weak housing market… The Vanguard REIT ETF (NYSEARCA:VNQ) is down 5.5% year-to-date. Similarly, iShares Dow Jones U.S. Real Estate Index Fund (NYSEARCA:IYR) is down 5.0%... Bucking the downward trends include PowerShares Dynamic Building Construction Portfolio (NYSEARCA:PKB) and SPDR DJ Wilshire International Real Estate ETF (NYSEARCA:RWX). PKB uses a quantitative strategy, which could account for it's high performance; it's up 25.4% for the year. RWX is up 3.6% year-to-date."

Can you Judge a Homebuilder by its Book Value? (Barry Ritholtz in Seeking Alpha, July 11th): "What makes [the homebuilders book value debate] intriguing is the combination of players in the space: The Homebuilders are loved/hated by an odd amalgam of value investors, technicians and short sellers... With the biggest problem in the residential homebuilding sector being the enormous competition from the huge overhang of inventory for sale, I suspect the Homebuilders have a ways to go before they are attractive again… As this debate plays out, the ISE Homebuilders Index made a new multi-year low on the weekly charts:

Ryland Expects Second-Quarter Loss Of $1.25 To $1.35 A Share (MarketWatch, July 10th): "Ryland Group (NYSE:RYL) said late Tuesday it expects to report a Q2 loss of $1.25-$1.35/share… due to "continued deterioration in the housing market," it expects to incur $145m-$155 million in Q2 pre-tax charges related to inventory impairments and write-offs [with] assets in Arizona, California, Florida and Nevada. Excluding inventory impairments and write-offs, Ryland expects to post a Q2 profit of $0.75-$0.80 cents/share… [and] said preliminary sales for Q2 were 2,521 units, down 16.6% from last year, and cancellations were roughly 34% of gross orders, versus 35.9% a year ago. Preliminary closings in the period totaled 2,461 units, down 35.3% from 2006."

D.R. Horton Says Home Orders Plunged 40%; Will Post Q3 Loss (Eli Hoffmann in Seeking Alpha, July 10th): "D.R. Horton (DHI): Cancellations climbed to 38%, up from 32% in Q2. Historically, cancellations are 16-20%. During its previous earnings call, the company blamed growing cancellations on buyers who bought on condition of selling a previous home, which they were unable to do, and people simply changing their minds. Also, banks have begun implementing stricter lending guidelines, resulting in fewer eligible borrowers... In Q2, D.R. Horton saw profits plunge 85%. Shares are down 25.3% YTD."

DR Horton Amends Credit Agreement (Forbes, July 10th): "DR Horton Inc. has amended its revolving credit agreement to remove limits on the homebuilder's ability to pay dividends, according to a regulatory filing Tuesday with the SEC. Under the amended agreement, DR Horton may make any distributions to shareholders, provided there is no payment default and the distribution does not interfere with the company's compliance with its financial covenants. Wachovia Bank NA (NASDAQ:WB) is serving as administrative agent for the credit agreement, which was dated Dec. 16, 2005."

Homebuilder Land Write Down Can Skew Book Value (Keith Lenger in Seeking Alpha, July 10th): "[A Monday WSJ] article points out that the last time book value was this low, homebuilder stocks rallied... Our take is that there is long term fundamental value in the big players. [Last time] we missed the rally. However, it looks like the opportunity has presented itself again. This time we are going to begin researching the main players Beazer (NYSE:BZH) , Hovnanian Ent. (NYSE:HOV), Lennar (LEN), Toll Brothers (NYSE:TOL) (love their product) and KB homes (NYSE:KBH) to name a few… We don’t think the housing slump is over yet, but we will sell puts on the stocks that are singled out."

Commercial Real Estate and REITs

High Midtown Rents Forcing Business Downtown (NY Sun, July 11th): "Cushman Wakefield Vacancy Report: "High office vacancy rates in Lower Manhattan are quickly becoming a thing of the past, as businesses pinched by high rents in Midtown are snatching up office space in the cheaper, growing downtown market. The vacancy rate for downtown dropped five points in the past year, to its current rate of 6.3%.... Rents in Midtown are up more than 30% from a year ago, fetching an average price of $75/sf for high-end, class A office space, with numerous leases signed for more than $125/sf. High rents have also caused a flurry of office building sales this year."

Clipper Clipped Again in $1.3B Bid for Starrett City (Globe St., July 10th): "Clipper Equities' $1.3-billion bid for Spring Creek, the massive apartment complex better known as Starrett City, has been scuttled once again. The Federal Department of Housing and Urban Development is holding to its belief--the same conviction that struck down Clipper's bid this past March--that the affordability of the more than 5,800 apartments would be jeopardized by the sale."

Health Care REIT "buy" (New Ratings.com, July 10th): "In a research note published yesterday, analysts at Cantor Fitzgerald maintain their "buy" rating on Health Care REIT Inc (NYSE:HCN). The target price is set to $5."

Houston REIT Buys Seattle Building (Seattle Times, July 10th): "A Texas-based REIT has bought another building in Seattle. Hines REIT of Houston said it paid about $72 million for Fifth & Bell, a five-year-old, six-story office building on Fifth Avenue between Bell and Battery streets downtown. The seller was Touchstone Seattle Venture II. Hines said the building is 83% leased, with such tenants as Philips Electronics, Edelman Worldwide and West Travel. Last month, Hines bought the Seattle Design Center in the Georgetown neighborhood for $57m."

Harlem Retail Portfolio Fetches $50M (The Real Deal, July 10th): "Commercial brokerage and development firm Giscombe Henderson recently brokered the sale of 16 retail buildings in Harlem for $50 million. The properties, located at 112-118 West 125th Street, 250 West 125th Street, 301-303 West 125th Street and 2331-2349 Frederick Douglass Boulevard, total 35,000-sf. The per-square-foot price of $1,430 is the highest paid to date for retail space along 125th Street, according to Eugene Giscombe, president and founder of Giscombe Henderson."

NYC Building Sales Surged 83% In First Half (Crain's New York Business, July 10th): "Cushman & Wakefield: More than $2.3 billion worth of downtown Manhattan office properties changed hands in Jan.-June, 2007 – compared to just $647 million in Jan.-June, 2006… Overall, Manhattan building sales in Jan.-June, 2007 totaled $34.1b, a staggering 83% increase over last year… The buyers gobbling up properties below Canal Street include newcomers like Mack-Cali Realty Corp., which entered the New York City market for the first time with its $237m acquisition of 125 Broad St. Others are established city players like Broadway Partners, which acquired 100 Wall St. as part of its acquisition of a portfolio from Beacon Capital Partners."

Web Site of the Day

Markit.com delivers "independent asset pricing, forecasting and research services" to the financial community, and it is the birthplace of subprime indices. So if you want to see what happens to subprime in action look at the charts behind those scary subprime articles. Here's a sampling, and yes, they really are scary.